What is a disadvantage for advertisers in a first-price auction format?

In a first-price auction format, advertisers submit their bids for ad placements, and the highest bidder wins while paying the exact amount they bid. One significant disadvantage in this system is that bidding less than their true value can lead to losing the auction. This creates a dilemma for advertisers: they must determine not only what they are willing to pay but also carefully gauge how much to bid based on their assessment of competitors' bids. If they underbid—perhaps out of caution or based on an inaccurate assessment of competition—they risk losing the opportunity to win the impression altogether, even if they would have been willing to pay more.

This predicament emphasizes the strategic aspect of bidding in a first-price auction, where the winning bidder may feel pressure to bid closely to their value to avoid losing out, but this can lead to winner's curse scenarios where they overextend their budget. Conversely, bidders must balance the risk of bidding too low and losing with the need to avoid overpaying, which contributes to the complexity and sometimes unsatisfactory outcomes of this auction format.